ASIC warns all fintech business lenders over contracts

The corporate regulator wants all online business lenders to remove unfair terms from their contracts just like Prospa has done, indicating start-ups that want to compete against banks will be held to similar regulatory standards as community expectations lift following the royal commission.

In a letter sent last week to Brad Kitschke, CEO of industry lobby group FinTech Australia, the Australian Securities and Investments Commission declared "action [is] required".

ASIC said it "will consider regulatory action where appropriate" if fintechs don't comply with the 2016 laws that prevent lenders using excessive contractual power over business borrowers.

Australian Finance Industry Association chair Bernie Campbell (seated) with signatories to the ​Online Small Business Lenders Code of Practice. Supplied.

"ASIC requests Fintech Australia to ask its members to consider the changes made by Prospa, to assess whether their loan contracts need to be amended to ensure compliance with the unfair contract terms law," said the letter, obtained by The Australian Financial Review.

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"ASIC considers that the changes made by Prospa are particularly important and relevant for the fintech lending industry, given that Prospa is one of the six online small business lenders to develop the AFIA Online Small Business Lenders Code of Lending Practice aimed at improving transparency and lending standards of the broader fintech lending industry."

It is understood its standard contracts were written by a major law firm and similar contracts are used by other lenders, including some non-banks, which are also being audited by ASIC.

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Mr Kitschke said he was sharing ASIC's letter with members. "At the heart of the fintech industry is a desire to deliver products and services that meet consumer needs and increase accountability and transparency," he said.

"We would urge all providers of financial services to take steps to ensure that their products meet these requirements."

The clauses removed by Prospa were flagged as being problematic by ASIC in its 'Report 565'.

Prospa removed a borrower's indemnity clause, meaning they are no longer required to indemnify Prospa for losses or costs incurred due to its fraud, negligence or wilful misconduct.

ASIC also forced it to amend the 'unilateral variation' clause, limiting its ability to vary contracts; the 'early repayment clause', so borrowers can prepay loans early without Prospa's consent, and clauses defining events of default, to add remediation periods and materiality thresholds.

Prospa said earlier this month some of these terms had not been relied upon historically and they clarified or reflected existing lending policies. Prospa said the amendments "do not have any material impact on the company financially or operationally".

The heightening regulatory scrutiny by ASIC on the fintech business lenders comes as the US Senate's banking committee this week conducts hearings on fintech, after the US Treasury department issued a report in July that made 80 recommendations. These were mostly encouraging of fintech innovation within a regulated space, including the creation of a fintech "charter" to improve governance.

ASIC's letter to FinTech Australia last week comes after it wrote to the organisation on May 7, also asking for its members to comprehensively review their small business loan contracts.

James Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at jeyers@afr.com.au